Method and system for providing financial functions

ABSTRACT

A method is disclosed for providing financial functions by an agent for each of a plurality of clients. One embodiment includes, relating to a financial function of each client, demonstrating that more than one activity of the agent can be transparent to the client, receiving financial information at the agent, creating risk management information relating to the financial information, analyzing the risk management information in the context of the financial information, determining an action based on the analysis, facilitating implementation of an action on behalf of the client, and communicating with the client one or more activities of the agent.

FIELD OF THE INVENTION

The present invention relates to the field of financial risk managementand trading, and, more particularly, to a method and system for clientsto outsource financial functions to an agent.

BRIEF DESCRIPTION OF THE DRAWINGS

The invention will be more readily understood through the followingdetailed description, with reference to the accompanying drawings, inwhich:

FIG. 1 is a flowchart of an embodiment of a method 100 of the presentinvention;

FIG. 2 is a block diagram of a system 200 of the present invention; and

FIG. 3 is a block diagram of an information device 300 of the presentinvention.

DETAILED DESCRIPTION

Overview

Shareholders tend to increasingly demand that issuers focus on theircore functions. Such focus is believed to increase an issuing firm'sefficiency and to allow shareholders to understand the risk-returncharacteristics of each of their investments and therefore manage thediversification of their own portfolio. Publicly held companies havetypically responded by spinning-off non-core businesses and de-mergingbusinesses where there is not clear synergy with the core business.However, de-merging and spinning-off businesses can be traumatic andirreversible processes, which most companies attempt to complete asquickly as possible in order to minimize the internal disturbance.Further, it is generally not possible to undergo a testing phase becauseof market sensitivities. These approaches therefore would not beappropriate for functions that, although not considered to be core, areregarded as vital to the running of the core business.

Outsourcing can be an option for managing such functions and, over thelast few years, has grown into an important service industry,particularly for support functions. Typical functions being outsourcedare IT maintenance and support, facilities, security, etc. In thefinancial sector, typical functions being outsourced tend to berestricted to back-office functions such as settlements, clearing, safecustody, etc.

More recently, however, all firms have begun to outsource functions thatwere previously considered too close to either the strategic managementof the core business or to the identity of the firm for outsourcing. JPMorgan outsourced both the ownership and management of the buildingsfrom which it operates in the major financial centers. Some years ago,the concept of a prestigious firm not being the owner of the buildingthat stands as a symbol of its reputation and prestige would have beenunthinkable. Another surprising announcement was the outsourcing of theentire Human Resources function of BP Amoco to a relatively smallCalifornia firm. The outsourcing of financial functions analogous tothese has not been done as yet. Typical financial functions aretreasury, credit management, risk management, and trading, together withseveral of their associated sub-functions.

Treasury management, for example, can be subdivided into the followingfinancial functions: short-term funding and cash management, debtmanagement, asset and liability management (“ALM”), and commodity pricerisk management. Another example of financial functions is market riskmanagement comprising the middle-office support for the above treasuryfunctions. Yet another example of financial functions is creditmanagement, which can be subdivided into the following financialfunctions: credit spread trading (which can be further subdivided intothe front-office credit spread trading function and the middle-officecredit risk management function typically performed by more than onedepartment, e.g. the market risk department and the credit department),counterparty exposure management, collateral management, credit riskmanagement, and loan portfolio management. The last four financialfunctions are primarily middle-office type functions.

The activities that make up these financial functions are the relevantdaily operations of the front-office trading departments and theassociated middle-office risk management and back-office supportdepartments.

Front-office activities can include:

1. Trading execution, sometimes referred to as passive trading.

2. Active trading, sometimes referred to as discretionary trading.

3. Hedging, sometimes referred to as front-office risk management.

Middle-office risk management activities can include:

-   -   1. Monitoring market and risk limits utilizations, reporting on        accidental limit excesses, market and credit values-at-risk, and        results of stress tests.    -   2. Monitoring credit risk limits utilizations with        counterparties, borrowers, and corporate bond positions. This        may include the computation of net counterparty exposure taking        into account netting agreements, the production of daily credit        limit utilization reports, and the processing of front-office        requests for credit limit increases to the appropriate credit        departments and/or management for authorization purposes.    -   3. Collateral management and reporting.    -   4. Supporting the front-office trading operations on the        management of the lending and/or borrowing of securities and on        the production of inventories reports.    -   5. Monitoring that all transactions are undertaken with eligible        counterparties and on eligible financial products, and        processing the front-office requests for increases in the        universe of such counterparties and/or products.    -   6. Producing daily profit and loss (“P&L”) reports. This is        generally part of the middle-office function, although it could        in principle be part of the back-office function.    -   7. Analyzing realized historical P&L combined with the        historical risk limit utilization reports. Even if the P&L is        produced by a financial control department as part of the        back-office, such analysis provides a means of analyzing        financial performance relative to the risks taken. Since risks        need to be supported by capital, such analyses provide a measure        of the returns on the capital utilized by the business and of        the consistency of such returns. This type of analyses is an        example of the management reporting function of the        middle-office.    -   8. Comparing daily the actual P&L to a predicted P&L        (constructed from the risk limit utilization reports of the        previous day and the changes in prices and/or rates since the        previous day). This is an example of an important operational        risk management function of the middle-office.    -   9. Reporting output from the above activities to, for example,        regulators. Another example of the external reporting functions        of the middle-office is capital utilization reports.

“Back-office” support activities can include:

-   -   1. Settlements, which is the activity that ensures that all        transactions/agreements entered into by the front-office are        executed as agreed between the front-office and the        counterparties.    -   2. The clearing and the reconciliation of cash balances, which        ensures that, for each currency, business function, and/or        subsidiary, the statements received from the counterparties        corresponds to the internal cashflow reports constructed from        the balances of the previous day combined with the inflows and        outflows during the course of the day.    -   3. Payments, which is the activity that ensures that all        payments are made and/or received as specified within the        executed agreements.    -   4. Documentation, which is the activity (sometimes combined        within the activities of the legal department) that ensures that        all executed transactions/agreements are supported by suitable        legal documentation in each jurisdiction.    -   5. Safe custody, which is the activity that ensures that all        contracts and/or certificates relating to        transactions/agreements entered into by the front-office are        safely kept and/or can be promptly delivered as and when        required. Whenever third party custodians are used in some        areas, there is still a need to cross-check that the statements        from the third party custodians agree with the internal        inventory records.

The activities of the financial functions operate upon financialinstruments, which can include each individual transaction/agreementthat has been executed and/or might be executed, as well as exposuresand/or operational cashflows. Transactions/agreements can be groupedinto assets, liabilities, and/or derivatives, and can be financial (e.g.bonds, loans, equity shares, interest rate swaps, FX options, creditdefault swaps, etc.), related to traded commodities and theirderivatives (e.g. gold price forwards, oil price swaps, copper priceoptions, etc.), related to traded electricity (e.g. electricity pricefutures), related to insurable risks (e.g. insurance policies forweather, legal claims, documentation risks, property, life, credit,political risks, etc.), related to real estate, related to pensionclaims, related to legal claims, related to credit exposures (e.g.,loans, bonds, counterparties, etc.), and/or related to operationalcashflows. Operational cashflows can arise from the sale or purchase ofservices or products, while exposures to an underlying credit, priceand/or rate can arise from a collection of one or moretransactions/agreements and/or operational cashflows.

One important operation of the activity upon financial instruments canbe a trade, which produces a position on the financial instrument. Theremight be several trades on the same financial instruments over anyperiod of time. For example, in the case of a bond, during the course ofa day there might be both sales and purchases of different amounts ofthe bond. If the net position is negative, the net position is said tobe a “short position”, otherwise a “long position”.

Other operations of the activity upon financial instruments are middle-and back-office type operations as described above.

Not all activities upon financial instruments define a financialfunction. For example, a portfolio of derivatives with the samecounterparty does not necessarily constitute a financial function justbecause all the financial instruments (i.e. all the derivatives) have acommon counterparty. However, if the counterparty is the onlycounterparty with whom the client trades derivatives in connection with,say, its ALM function, and the portfolio of derivatives is accompaniedby a set of guidelines that describe, for example, its purpose,objectives, and/or criteria for measuring performance, then suchactivities upon the portfolio of derivatives might qualify as afinancial function.

Similarly, the solitary activity of seeking the best availableinvestment product and/or house loan or mortgage at a particular pointin time does not necessarily constitute a financial function. However,the on-going management of investments and loans and/or mortgagesfollowing specified guidelines might qualify as a financial function.

Turning to outsourcing, the outsourcing of back-office functions is awell-established business of management consultancy firms, yet thecombination of back-office functions with the entire middle-officefunction is unknown. This is because there would be an additionalliability for the agent that took over an entire middle-office functionwithin a separate information environment from that used by the clientfor the front-office functions. For example, whenever profit and loss(“P&L”) and risk limit information is provided by an agent to a client,an error could lead the client to implement the wrong strategy and, withthe benefit of hindsight, the client could always claim that he wouldhave followed a different strategy had it not been for the error.Without transparency between the front-office activities of the clientand the middle-office activities of the agent on behalf of the client,quantifying the liability of the agent would be difficult and thereforethe cost of insuring it would be very high. This is one of the reasonswhy firms offering back-office outsourcing have been reluctant to evenconsider providing the middle-office function. Moreover, theseback-office outsourcing firms tend to feel that middle-office functionsare just too close to front-office trading activities of clients.Trading requires highly specialized market knowledge and skills, and istherefore regarded by firms that provided back-office outsourcing asbeing outside the scope of their business.

Transparency can mean enabling the communication of information and/orthe access to information across a network. Real-time transparency meansthat the information would reach the other party with a delay of lessthan say a relatively few seconds (such as, for example, within 0 to 60seconds, 0 to 15 seconds, and/or 0 to 5 seconds). Near-real-timetransparency means that the information would reach the other party witha delay longer than just a relatively few seconds (such as, for example,within 5 to 600 seconds, 10 to 60 seconds, and/or 15 to 30 seconds).On-demand transparency means that the information reaches a requestingparty only after requested. Thus, on-demand information can be receivedin real-time, near-real-time, or after a substantial delay.

Some prime brokers and custodians might provide certain middle-officefunctions to their clients in order to attract more business, but onlyin respect to the transactions undertaken through them or under theircustody, and typically without any form of transparency. Since clientstend to have more than one prime broker and/or custodian, thismiddle-office outsourcing is of limited use. This is because, unlike theevaluation of total returns/costs on a portfolio ofinvestments/liabilities or the production of total P&L statements, whichcan be constructed as the sum of the parts evaluated independently, theconstruction of total risk requires certain knowledge of the entirefinancial function of the client. Otherwise, diversification effectsmight not be captured, and, more importantly, it might not be possibleto even define the concept of “risk” which typically depends on theperiod over which performance is to be measured together with otherstrategic objectives of the financial function.

Contrary to outsourcing, there are a number of risk managementApplication Service Providers (“ASPs”), which includes software modelsoffered via networks by investment banks and their affiliates that allowclients to use the risk management and trading tools themselves and toseek information. The responsibility, however, for implementing andcorrectly using these software tools, seeking the appropriateinformation, and using the information, remains with the client, as theASP only assumes the responsibility for maintaining the software and thehardware. In order to evaluate the benefits of an ASP, the keyassumption is that the ASP is used properly and the client acts on theinformation received, as expected by the designer of the software or theASP. The liability for the ASP is therefore the same as that for thesale of any software or the provision of advice. There are also softwarevendors and advisors that offer trading and risk management models,sometimes in the form of ASPs, that might allow clients to improve themanagement of financial functions mentioned above, but always assumingthat the models and the advice are used properly. Financial softwareservice providers typically do not act on behalf of their clients.Further, ASPs, software vendors, and advisors typically provide servicesand products for end-users within a particular vertical or sector,rather than for agents acting on behalf of multiple clients whosebusiness might span multiple verticals or sectors. In this context, itshould be emphasized that a client that provides, say, internet bankingservices to its clients is still regarded as an end-user because theinternet banking services constitute one vertical or sector.

Although in theory investment banks could develop the technology tooffer to undertake certain activities of some of their clients'financial functions, this undertaking would need to be carried outwithin Chinese walls to avoid conflicts of interest between thosetraders acting on behalf of clients and in the clients' best interestsand those traders of the investment bank acting as principals, ratherthan agents, with other clients, counterparties, and/or exchanges.Chinese walls are internal procedures designed to deal with conflicts ofinterest between different teams within the same firm and, inparticular, to separate a Mergers & Acquisitions (“M&A”) type advisorybusiness from a trading business. However, Chinese walls for multipleclients within the same or similar trading business are difficult toimplement, and frequently impossible to manage effectively and safely,so that, in practice, investment banks would need to set-up separatesubsidiaries to undertake the business of providing financial functionsto their clients. No such subsidiaries have been set-up other than toprovide pricing and risk management services, typically either in theform of risk management and trading software sales and advice or in theform of ASPs.

In contrast to investment banks, the regulatory framework governing fundmanagement activities is such that it would allow fund managers toassume financial functions of a plurality of clients with no conflict ofinterest. However fund managers have focused on increasing the size ofthe funds under their management through the sale of fund shares totheir clients. The background and business culture of fund managers hasnot encouraged them to seek to enhance the services they provide toclients whose funds they manage nor has it encouraged them to approachother clients that could benefit from outsourcing financial functionswhich do not involve the management of money. In the few instances wherefund managers provide investment management functions to their clientsas agents, rather than as principals selling fund shares and trading onbehalf of the fund, they have done so without demonstrating transparencyto their clients and without enabling the clients to interact with theagent, access information, and/or monitor the agent's activities.

Furthermore, unlike investment banks, fund managers are not creators oftechnology and have consequently, at least until now, been reluctant toembark in technology intensive businesses. Investment banks, on theother hand, have provided state-of-the-art risk management technology toclients initially as a means of generating more business, and onlyrecently on “an arms-length basis” through their technology affiliates.However, investment banks have avoided the provision of standardtechnology and assistance to clients in the more labor intensivemiddle-office functions and back-office functions, namely becausemanagement consultants have been better equipped to provide suchfunctions at a lower cost and without conflicts of interest.

Thus, there has not been a sector of the financial services industrythat possess the necessary ingredients, in terms of demonstratingtransparency, business culture, absence of conflicts of interest, andexpertise in creating models that can cope with both high transactionvolume and state-of-the-art analytics, to focus on the commercial and/ortechnical aspects of embodiments of the present invention.

The lack of appropriate data interchange standards has also made certainembodiments of the present invention commercially infeasible until now.For example, unlike a fund manager, who typically only needs to receivethe funds and investment criteria from the client in order to getstarted, a financial risk manager (i.e. the agent in the presentinvention) typically needs to receive detailed transaction informationon all the financial instruments and their positions relevant to thefinancial function. The commercial feasibility of providing financialfunctions for multiple clients which requires the agent to receive suchdetailed and frequently very complex information is enabled todaybecause of the development of data interchange standards, such as XML,by which network-based systems can communicate in such a manner as toallow the relative low cost transfer of large quantities of detailedtransaction information from potentially many different electronicsources.

Finally, the lack of reliable communication security has also held backthe imagination of potential inventors of the various embodiments of thesystems and methods of the present invention. For example, it is onlyrecently that cryptography has become standardized, wide spread, andtrusted sufficiently for use on public networks as opposed toproprietary closed networks. Examples of such technologies arepublic-key encryption, key certification, digital signatures, hashfunctions, SSL, etc. Currently, there are no agents that provide entirefinancial functions to their clients by demonstrating transparency.Conversely, clients are unlikely to outsource financial functions to anagent if the agent is not able to demonstrate transparency and lack ofconflicts of interest. Further, it is unlikely that potential agentscould run financial functions at costs lower than those incurred by theclients without the appropriate secure and reliable data transfertechnology and/or without being able to quantify the liabilityassociated with the running of such functions.

Notably, in many situations, real-time or near-real-time transparencycan be necessary for an agent to earn sufficient trust from a client sothat the client is willing to outsource entire financial functions, andin some situations can also be necessary for the agent to be willing toassume the liability associated with taking over such financialfunctions. To achieve such transparency, certain embodiments of theinvention recognize that a network-based user interface can beadvantageously provided to enable a client to access continuously, inreal-time or near-real-time, information relating to the day-to-dayand/or intra-day activities of an agent acting on behalf of the client.In certain situations, this monitoring can be done more effectively thanmonitoring the activities of the client's own risk management andtrading staff through a glass partition. The client might access,through the network-based user interface, the risk managementinformation generated by the agent and thus determine how the agentreacts to such information without the need to request the informationfrom the agent. The access to the information on the activities of theagent can be silent, wherein the agent is not made aware when the clientis monitoring the agent's activities, or can be based upon requests madeby the client through the network.

In addition to monitoring, the client can also receive informationautomatically from the agent via this network-based user interface, orthrough different methods, such as, for example:

-   -   1. Urgent messages can be received at the client, for example,        on a screen of a computer, pager, wireless telephone, and/or        wired telephone, etc. An example of such a message is: “The JPY        interest rate position has exceeded the 10-year equivalent limit        by 8%. The sale of N futures contracts would restore the        position to 10% inside the limit. These contracts will be sold        within the next x seconds unless we receive your stop message        beforehand”;    -   2. A less urgent message can be received at the client via an        e-mail, voice-mail, and/or fax, etc., such as, for example, “EUR        y million deposited with XYZ bank to mature in two days. The        deposit will be rolled over with TVW, another eligible deposit        counterparty that has posted a better rate, unless we receive        your overrule message before 9:30 am tomorrow”;    -   3. Daily market and credit limit utilization reports can be        received via e-mail, fax, push-technology, and/or posting to a        web page, etc.; and    -   4. Weekly and monthly performance and risk reports, both in        terms of the average expected volatility of positions and in        terms of consistency of past realized performance can be        received via e-mail, fax, push-technology, and/or posting to a        web page, etc.

Furthermore, the client might even participate, over the network-baseduser interface, in new product, credit, and/or market risk committeesconducted by the agent on behalf of the client. If desired, the clientcan interact with the agent over the network by, for example, modifyingthe financial guidelines in light of new information, historical actionreviews of the activities of the agent, and/or the behavior of theeconomy, markets, and/or clients. Conversely, the agent can request theclient to modify financial guidelines in light of such information andthe client might or might not accept the recommendations of the agent inthis regard.

The above type of transparent access to information between a client andan agent, combined with communication security over public networks, thewidespread use of data interchange standards, and the proliferation ofexchanges and counterparties that permit and/or facilitate theelectronic identification, negotiation, and execution of trades, havehelped to make certain embodiments of the present invention useful,practical and commercially feasible today.

A more detailed description of various embodiments of the presentinvention follows.

Additional Description

Certain embodiments of the present invention provide a method forproviding financial functions by an agent for each of a plurality ofclients. One embodiment includes, relating to a financial function ofeach client, demonstrating that more than one activity of the agent canbe transparent to the client, receiving financial information at theagent, creating risk management information relating to the financialinformation, analyzing the risk management information in the context ofthe financial information, determining an action based on the analysis,facilitating implementation of an action on behalf of the client, andcommunicating with the client through a network one, two or moreactivities of the agent.

An action can include the negotiation and execution of a transaction ortrade with a third party that results in the creation of a bindingcontract between the third party and the client. An action can alsoinclude an instruction or recommendation for the client to enter into abinding contract with a third party but where it is expected and/oragreed by the agent and the client that such instructions orrecommendations will be followed by the client under the normal courseof events. The client might from time to time overrule the agent and/orchange the financial guidelines and/or risk limits.

Certain embodiments of the present invention can involve front-officeactivities, which, as mentioned above, can include trading execution,active trading, and/or hedging.

“Trading execution” can mean the execution of trades in line with thefinancial guidelines on a best efforts basis by the agent. Tradingexecution can be performed in a number of financial functions,including, for example:

-   -   1. Cash management and short-term funding, e.g. issuing        certificates of deposit and entering into foreign exchange        forward contracts. An execution-only trader might contact two or        three counterparties, or communicate with one or more exchanges,        compare prices and execute. Depending on the liquidity of the        market, more than one trade might be needed with one or more        counterparties and/or exchanges to achieve the desired position.    -   2. ALM, e.g. hedging operational cashflows. An execution-only        trader might hedge an $80 million outflow in year 5 by buying        the appropriate number of zero coupon Treasury bonds through one        or more counterparties and/or exchanges. If there is no zero        coupon bond of the exact maturity of the operational cashflow,        the trader might need to work out the nominal size of the bond        to be purchased that is required to hedge the position in        accordance with the financial guidelines provided by the client.    -   3. Credit management, e.g. combining the credit exposure created        from the client's commercial lending operations, from credit        spread trading and/or from counterparty exposure on the client's        treasury operations. An execution only credit trader, in charge        of managing the credit exposure to one or more credits, might        sell bonds and/or loans linked to the relevant credits provided        that such bonds and/or loans are available to the trader to        sell, and otherwise the credit trader might use of credit        derivatives with eligible counterparties to manage the exposure        to the relevant credit. In this case, the execution trader might        reduce the exposure in accordance with the financial guidelines        by determining the required type and size of trade or trades,        contacting counterparties, negotiating the best price and terms,        and executing the trade or trades on behalf of the client.

“Active trading” can mean execution of trades beyond those required tofollow the financial guidelines, but within the risk limits, and at theagent's own discretion. Active trading can be implemented in a number offinancial functions, including, for example:

-   -   1. Cash management and funding, e.g. an active trader might not        wish to enter into the foreign exchange contracts required to        maintain the currency composition specified in the financial        guidelines after the issuance of the certificates of deposit.        This could be because the trader believes that the currency in        which the certificates of deposit were denominated might be        devalued and therefore wishes to take an even bigger position        relative to the financial guidelines or benchmark by selling        options on that currency. The active trader would be entitled to        enter into such option contracts provided that he remains within        the risk limits. At the end of the evaluation period, the        performance of the strategy will be measured and, if the trader        was correct in his assessment of the market, then both the agent        and the client might benefit as the client will keep the profits        and the agent might earn an out-performance fee. If the result        is a loss, then this might be absorbed in its entirety by the        client with immediate effect and through time by the agent as        the cumulative effect of the loss might be deducted from future        out-performance fees. If the out-performance fee is allowed to        be negative, then the agent might need to be capitalized.    -   2. ALM, e.g. an active trader might buy more zero coupon bonds        than those required to hedge the $80 million payment of example        2 above if his view of the market was that year 5 interest rates        will rise. Example 2 above is the neutral strategy or benchmark        against which the performance of the active trader can be        evaluated.    -   3. Credit spread trading, e.g. an active credit trader might        have a view on the credit position that was created through the        client's operations and might or might not want to follow the        action specified by the financial guidelines undertaken in the        case of example 3 above. If the active credit trader chooses not        to follow the neutral strategy or benchmark, then his        performance relative to that neutral strategy or benchmark might        be measured. Any gain or loss might be assumed by the client        with immediate effect, and by the agent in due course through        his out-performance fee arrangements.

The activity that includes execution traders and active traders istypically referred to as front-office activities, dealing roomactivities, and/or trading activities. For small financial tradingoperations, only relatively senior managers have active tradingdiscretion so that the front-office tends to comprise mainly executiononly traders. For large financial trading operations, active traders areincluded within the front-office. In practical terms, the distinctionbetween a change in the neutral strategy or benchmark and an activetrading decision is rather artificial, and it is therefore notimperative make such a distinction unless the client wishes to measurethe performance of the different components of the financial function.The differentiation between changes in the neutral strategy or benchmarkand active trading decisions can be important if the financial functionis to be outsourced to an agent engaged in discretionary trading,otherwise it might be difficult to determine a fair out-performance fee.

The activity that includes front-office risk management is frequentlyreferred to as “hedging”. Such activity can also be regarded as part ofthe activity of execution-only traders and/or active traders. Forexample, if a trader at the client (or at the agent acting on behalf ofthe client) provides an interest rate swap to a client of the client whois an end-user (rather than a market counterparty), then such a tradermight “hedge” the risk created by the provision of such swap by, forexample, buying and/or selling futures contracts with an exchange.

Embodiments of a method of the present invention can allow for an agentto perform middle-office activities on behalf of multiple clients where,in some cases, each client might be outsourcing either a different typeof financial function, a different class of financial instruments withinthe same activity, different financial guidelines, different benchmarks,different measures of performance and/or risk, and/or different risklimits within the same type of financial function.

Embodiments of a method of the present invention can also provide forhigh levels of security to prevent any client or any third party fromaccessing and/or receiving unauthorized information and/or interferingwith the activities of another client or of the agent on behalf ofanother client.

Further, embodiments of a method of the present invention can includethe appropriate internal procedures and regulatory framework to avoidinternal conflicts of interest at the agent, such that the agent remainsconflict-free. Financial regulators of the agent might monitor theseprocedures, particularly if the clients of the agent include unregulatedclients such as corporates and other end-users.

Other embodiments of the method of the present invention can include theappropriate internal procedures and security framework to reduceoperational risk at the agent when acting on behalf of the client. Forexample, the front-office of the agent might have the authority to testthe effect of new potential transaction but might not have theauthorization to modify a transaction once booked. Conversely, themiddle-office of the agent might have the authority to modify atransaction that has been booked in error but might not have theauthority to enter and book a new transaction. In particular, forregulated clients of the agent such as banks and other financialservices firms, financial regulators of the client might inspect theseprocedures and security framework at the agent before allowing theregulated client to outsource the financial function to the agent.

Method 100

FIG. 1 is a flowchart of an embodiment of a method 100 of the presentinvention. Method 100 can begin at activity 1010 by demonstrating thatone, two, or more of the agent's activities can be transparent to theclient. The demonstration can be performed by the agent, and can includean explanation of the activities of the agent. The demonstration canalso explain how the client might be enabled by the agent to accessinformation and/or monitor activities of the agent.

Method 100 can continue at activity 1020 by receiving financialinformation at the agent from the client. The financial information caninclude, for example, detailed information pertaining to the financialinstruments relevant to the financial function, financial guidelines forthe management of the function, a benchmark that provides criteria forthe measurement of performance of the agent, risk limits, if any, whichallow the agent to deviate from the benchmark at the discretion of theagent, and historic and current market price information in connectionwith the financial instruments.

An example of a financial guideline for a debt management financialfunction is to fund a treasury operation so as to meet specifiedliquidity guidelines at a cost of, say, government bonds plus 45 basispoints or better. The benchmark or neutral strategy in this case mightbe government bond yields plus 45 basis points.

Another example of a financial guideline for a credit risk managementfinancial function is to hedge all swaps counterparty or corporate bondnet credit exposures below a specified minimum credit rating providedthat netting agreements are in place in the appropriate jurisdiction.The returns, costs, or P&L of the hedged portfolio might constitute thebenchmark for the agent.

Risk limits can be used to allow the agent to use its discretion todeviate from the benchmark, provided that the actions facilitated by theagent do not infringe these limits. Risk limits can be expressed in manydifferent ways, for example: (i) a maximum deviation of +/−10% from thebenchmark currency composition of, say, 30% USD and 70% EUR; or (ii) amaximum deviation of 0.5 years from the debt portfolio benchmarkduration of, say, 2 years; or (iii) a maximum long or short exposure toSterling Pound interest rates equivalent to, say, £100 million of10-year Gilts, e.g. if interest rates fall by 10 basis points, then ashort position will lose approximately ±0.4 million (=−10 bp×duration of10-year Gilt×£100 million), while a long position will gain the sameamount.

Other examples of risk limits can be expressed statistically in terms ofvalue-at-risk. For example, a risk limit expressed as, say, $40 million10-day 95% value-at-risk means that the agent might use its discretionto deviate from the benchmark provided that such deviation, ifmaintained over a period of 10 days, would not have resulted in a marketvalue loss greater than $40 million other than in the worst 5% scenariosover the historical period considered for the calculation, typically ofthe order of 1-3 years.

Examples involving a credit management financial function might includemaximum holdings limits in each credit rating class (e.g. maximum of 30%of the total credit exposure in credits rated BBB or below), furthersplit by country (e.g. no more than 20% of the total exposure with Asiancredits) and by industry (at least 50% of the total counterparty creditexposure must be with banking counterparties rather than corporateend-users).

Other examples of credit risk limits can be expressed statistically asin terms of credit value-at-risk. For example, a credit value-at-risk of$100 million for a $1 billion total exposure means that maximum creditlosses for the total exposure over its life are only likely to exceedthe expected credit losses by $100 million in 5% of the scenarios.

At activity 1030, historic and current market information can bereceived by the agent typically from third parties, but some marketinformation might also come from the client, as described for activity1020, and as shown in activity 1035. Examples of historical informationfor financial instruments are: the end-of-month price of a ton ofcopper, the daily price of an equity share or of a unit of a corporatebond over the last year, end-of-month swap yield curves and FX rates forall European currencies over the last 3 years, and average monthlycredit spreads on the corporate bonds of BBB-rated issuers over the last5 years. Examples of current market information are today's prices,rates, credit spreads, and/or yield curves for the financial instrumentsmentioned above.

At activity 1040, risk management information can be created. To createrisk management information, the financial information can be combinedwith the historic and current market information. For example, thefinancial information might include positions on the financialinstruments relevant to the activity, such as 10-year bond shortposition in US Dollars and a long position in Sterling 3-month LIBOR. Amatrix can then be created, based on the historical and/or currentmarket information, that includes estimates of volatility of unitpositions in each of the above two financial instruments and of thecorrelation between them. Such a matrix can then be combined with thepositions to provide a measure of the risk of the combined positions orportfolio of positions. At one extreme, this risk management informationmight be created by a middle-office from millions of positions usinghigh performance computer models and large market historical databases,while at the other extreme it might be created mentally for a handful ofpositions by a front-office trader who will likely have an approximateview risk of each of his positions and of the relationships betweenthem.

More examples of front-office risk management information are positionreports produced by trading software models showing the netmark-to-market positions, together with position sensitivities measuressuch as: the price value of 1 basis point change in yields (“PV01”) or10-year bond equivalent type measures; the rate of change of price orvolatility with respect of changes in the underlying variables and therate of change of such rates of change (typically denoted with lettersfrom the Greek alphabet such as delta, gamma, vega, etc.); fundingprojection reports; rate reset reports; option exercise reports; andcredit spread sensitivity reports (e.g. broken down by sector, currency,and/or counterparty/issuer).

Another example of middle-office risk management information is theabsolute market value and market value-at-risk, cashflow-at-risk, orcredit value-at-risk of the benchmark itself. The benchmark actions canbe regarded as a neutral strategy for the management of the financialinstruments relevant to the activity and therefore one can calculate itsdaily market value (and/or rate of return in the case of a net assetportfolio or cost in the case of a net liability portfolio) and marketvalue-at-risk, cashflow value-at-risk, and/or credit value-at-risk.Examples of market value-at-risk and credit value-at-risk have beenprovided above. Cashflow value-at-risk is completely analogous to marketvalue-at-risk example above except that the loss is measured in terms ofa cashflow at a particular point in the future rather than market valuewhich includes the present value of all future cashflows.

Yet another example of middle-office risk management information is therelative daily market value and market value-at-risk of the actualactions undertaken by the agent relative to the benchmark actions. Inthe first example, i.e. the absolute case, the risk managementinformation is designed to assist monitoring the expected performance ofthe benchmark itself, while the second example, i.e. the relative case,is designed to monitor the expected performance of the agent.

Some of the front-office type risk management reports can also beproduced by the middle-office combining the activities of severaltraders and/or trading business, e.g. the overall exposure of the entirefront-office trading teams to a devaluation of the Euro, or the totalexposure to a raise in Yen interest rates expressed in terms of 10-yearbond equivalent positions. These are further examples of middle-officerisk management information.

Another example of risk management information is the daily cumulativeP&L and statistical measures relating to its historical realizationcompared to the utilization of the risk limits. Such risk managementinformation could include the standard deviation of the realized dailyhistorical P&L for the benchmark relative to that for the actual actionsof the agent, compared to the average relative value-at-risk utilized.This risk management information can be created based on a review ofhistorical actions of the agent at activity 1080 and fed back intoactivity 1040.

At activity 1045, the risk management information can be provided to theclient. This communication can take place through a network and can beautomated.

At activity 1050, the risk management information can be analyzed tocreate an analysis. An analysis of risk management information typicallyrequires combining it with other information such as economic andpolitical information together with the application of some form ofjudgment based on knowledge of the objectives of the financial function.For example, risk management information based on historical data mightbe useless information to determine an action during periods of crisis,where stress scenario type risk management information is likely to bemore appropriate. Further, the risk management information might also bemeaningless unless viewed in the context of the financial guidelines forthe financial function.

Although in more than one embodiments of the present invention someanalyses of risk management information are automated, typically thereis a need for either human action or for some form of “artificialintelligence” type action. The latter might be provided in someembodiments of the invention by an expert system able to triggerautomated actions based on knowledge of the financial function. Forexample, the expert system could determine, based on pre-programmedrules, that during periods of extremely high market volatility, thecredit rating or default probability of certain types of credits such ashedge funds deteriorates by a specified amount. The expert system couldthen use the revised data to modify the limits and/or trigger reductionsin the exposure to certain credits until normal market conditionsreturn. At the same, time the expert system can replace thevalue-at-risk measure used for the limits with a stress test measure,which is more appropriate during periods of financial crisis. Otherexamples of expert systems can be used by embodiments of the presentinvention where the actions are determined automatically by, forexample, communicating electronically with network-connected exchangesand/or counterparties and executing trades whenever certain triggerlevels (e.g. in terms of distance from the limits) are reached.

At activity 1055, the analysis can be communicated to the client whomight provide feedback. This communication can occur by any knownmethod, including in person, by telephone, facsimile, e-mail, pager,instant messaging, IRC, push technology to a browser, and/or publicationon a web page with notification thereof, etc.

At activity 1060, an action can be determined based on the results ofthe analysis. An action can be determined with or without feedback onthe analysis from the client, either in order to follow the financialguidelines and benchmark, or in order to deviate from the benchmark atthe discretion of the agent within the risk limits. An action caninvolve the negotiation and/or execution of a trade on behalf of theclient, or the provision of a recommendation or instruction to theclient to execute a trade. An action can also include the production onbehalf of the client of reports or notifications for the client, and itssubsidiaries, affiliates, clients, auditors and/or regulators.

Activity 1060 can include determining an action, which might include,for example, the automatic identification at a given time based onknowledge of the financial function of a best rate or price at which atrade can be executed. The information used for this activity can beobtained at activity 1030, for example, by communicating with two orthree exchanges and/or counterparties and receiving market informationwhenever certain conditions specified within the financial guidelinesarise. This can be followed by checking and comparing rates or prices,and selecting the best rates or prices. Moreover, in addition to thebest rate or price, a second rate or price can also be identified in theevent that the best prices might only be good for an amount smaller thanthe desired amount.

At activity 1065 the actions determined might be reported to the clientvia any previously described means, such as through a network, and theclient can provide feedback. For example, the client might request theaction to be halted.

At activity 1070, implementation of the action can be facilitated, andthis can happen with or without feedback from the client such as shownin activity 1075. For example, in activity 1070, the implementationmight be facilitated by the agent negotiating the documentation with athird party, and executing the trade with the third party on behalf ofthe client. Alternatively, implementation might be facilitated by theagent negotiating the contract with a third party and, providing thecontract document within the instruction or recommendation to the clientfor the client's signature, which can be a secure electronic signatureor otherwise. As another example, at activity 1070, implementation canbe facilitated by the agent by requesting, at activity 1075, that theclient click an on-screen button authorizing the agent to implement theaction on the client's behalf. Such instruction or recommendation mightoccur with the understanding that client approval is assumed, thusmerely providing the client an opportunity to request thatimplementation of the action be halted.

As yet another example, in activity 1070, implementation can befacilitated by the agent submitting a notification on behalf of theclient directly to auditors, regulators, subsidiaries, affiliates,and/or clients of the client. This type of implementation of action canhappen automatically and/or at regular intervals, but can also happenwhen pre-specified conditions are fulfilled or whenever the agentregards the action to be appropriate.

In activity 1080, the agent can review historical actions taken onbehalf of the client in light of new information, and in activity 1085,can communicate the results of this review to the client who mightprovide feedback to the agent, and the agent might receive that feedbackat activity 1020, 1040, and/or 1050 either before or after the agentreceives further financial information from the client. Activity 1080can enable the client to examine a verifiable audit trail ofcommunication given to and received from the client by the agent, aswell as a record of the information and data created and/or used by theagent to conduct analyses and/or undertake actions on behalf of theclient. Such records might be used with the benefit of hindsight toreconstruct the reasons for the actions undertaken by the agent onbehalf of the client. This historical transparency can protect both theclient and the agent from any disputes that might arise and give theclient and its regulator confidence that the agent is performing itsfunctions with competence and is working in the best interests of theclient. This audit trail can include a log of all trades (includingintra-day trades with dealer timings), a record of relevant marketconditions at the time of each trade (e.g. alternative rates/pricesavailable at the time of the execution of the trade), a record of theevolution of the positions and risk reports, etc.

The ongoing review of historical actions by the agent can also serve toimprove the agent's creation and analysis of risk managementinformation, and the decisions based thereupon. Therefore the results ofthese historical reviews can be fed directly by the agent into activity1020, 1040, and/or 1050.

Any of activities 1010 through 1085 can occur automatically (i.e.without human interaction), semi-automatically (i.e. with minimal humaninteraction, such as, for example, clicking an on-screen button toinitiate the activity), or with more extensive human interaction.

Moreover, the agent and the client can communicate across a network inconnection with the activities and sub-activities of method 100. Suchcommunication can occur in the form of reporting the agent's activitiesto the client, empowering the client to access information on one ormore of the activities of the agent, enabling the client to requestadditional information on one or more activities of the agent, and/orallowing the client to monitor the agent's activities with or withoutthe agent's knowledge. The reporting, accessing, and/or monitoring ofthe agent's activities can occur in real-time, near-real-time,on-demand, and/or intermittently.

Further, to the extent desired by the client, the client can interactwith the agent, either across the network or otherwise, to inquireabout, discuss, intervene in, and/or overrule an activity of the agent.The communication can occur by any known method, including those thatcan be enhanced to an acceptable level of security, including in person,by telephone, facsimile, e-mail, pager, push technology to a browser,publication on a web page with notification thereof, etc. In certainembodiments, the communication can occur in a secure manner.

Communicating an activity can include communicating completion of theactivity, results of the activity, and/or details of the activity.Communicating an activity can also include communicating a portionand/or all of the activity. For example, communicating an activity canoccur when the client monitors the agent's activity across a network.

System 200

FIG. 2 is a block diagram of an embodiment of a system 200 of thepresent invention. As an initial matter, it suffices to say that, usingthe description of method 100, one of ordinary skill in the art canimplement the functionality of method 100 via system 200 utilizing anyof a wide variety of well-known architectures, hardware, protocols, andsoftware. Thus, the following description of system 200 can be viewed asillustrative, and should not be construed to limit the implementation ofmethod 100.

Within system 200, a client information device 2100 can be used, forexample, to communicate with other information devices (e.g. anotherclient information device 2100, third party (e.g. exchange orcounterparty) information device 2200, regulator information device2300, information source information device 2400, agent informationdevice 2500, etc.), with a server (e.g. client server 2600 and/or agentserver 2700), and/or with third party market data server 2800. Clientinformation device 2100 can also be used, for example, to managedatabases, query databases, provide financial information, receive riskmanagement information, receive analysis results, receive actioninstructions or recommendations, implement actions, receive and/orimplement notifications and/or reports, facilitate the implementation ofactions, to access information on, and/or to monitor, activities of theagent.

Similarly, agent information device 2500 can be used by an agent tocommunicate with other information devices (e.g. client informationdevice 2100, third party information device 2200, regulator informationdevice 2300, information source information device 2400, another clientinformation device 2100, etc.), and/or with a server (e.g. client server2600 and/or agent server 2700). Agent information device 2500 can alsobe used, for example, to manage databases, query databases, receivefinancial information, create risk management information, analyze riskmanagement information, facilitate the implementation of actions, reviewhistorical actions, and communicate risk management information,analyses, results, instructions or recommended actions, implementedactions, notifications, reports, and/or to enable the client to accessinformation on, and/or monitor, activities of the agent.

Each information device 2100-2500 can be connected to network 2900. Alsoconnected to network 2900 can be servers 2600, 2700. Any informationdevice 2100-2500, and/or any server 2600, 2700, can be attached to oneor more databases (not shown), and can function as a server of the oneor more databases and/or software applications (not shown).

Third party information device 2200 can be used, for example, topropose, inquire, negotiate, communicate, and/or receive actions.Regulator information device 2300 can be used, for example, to request,communicate, send and/or receive reports, messages, and/ornotifications. Information source information device 2400 can be used,for example, to communicate financial information reports, messages,and/or notifications, such as, for example, market informationregarding, interest rates, exchange rates and/or the current marketvalue of a specified derivative.

Client server 2600 can be used to host one or more databases 2650, hostcommunication software, host web sites, serve files, serve e-mail, etc.Agent server 2700 also can be used to host one or more databases 2750,host analysis and/or communication software, host web sites, servefiles, serve e-mail, etc. Agent server 2700 can be a computing device ofany sort.

Network 2900 can electronically link physically distant informationdevices 2100-2500, and servers 2600, 2700, so that information can betransmitted and/or exchanged there between. Network 2900 can have anyarchitecture, including a direct connection, a local area network, awide area network such as the public switched telephone network and/orthe Internet, an extranet, and/or a combination thereof. Network 2900can be a packet-switched, a circuit-switched, a connectionless, orconnection-oriented network or interconnected networks, or anycombination thereof. Network 2900 can be oriented toward voice and/ordata communications. Moreover, a transmission media of network 2900 cantake any form, including wireline, satellite, wireless, or anycombination thereof. In certain embodiments, the transmission media ofnetwork 2900 can be limited to those that support the securetransmission of data.

From a hardware standpoint, any information device 2100-2500, can be,for example, a landline or wireless telephone, facsimile, personalcomputer, workstation, personal information manager, personal digitalassistant, handheld computer, data terminal, or other similar device.Similarly, any server 2600, 2700 can be, for example, a landline orwireless telephone, facsimile, personal computer, workstation,mini-computer, mainframe computer, personal information manager,personal digital assistant, handheld computer, data terminal, or othersimilar device.

Device 300

FIG. 3 is a block diagram of a typical information device 300, which cansymbolize any information device 2100-2500, and/or servers 2600, 2700.Information device 300 can include well-known components such as one ormore network interfaces 3100, one or more processors 3200, one or morememories 3300 containing instructions 3400, and/or one or moreinput/output (“I/O”) devices 3500.

In one embodiment, network interface 3100 can be a telephone, atraditional data modem, a fax modem, a cable modem, a digital subscriberline interface, a bridge, a hub, a router, or other similar devices.

In one embodiment, processor 3200 can be a general-purposemicroprocessor, such the Pentium series microprocessor manufactured bythe Intel Corporation of Santa Clara, Calif. In another embodiment, theprocessor can be an Application Specific Integrated Circuit (ASIC),which has been designed to implement in its hardware and/or firmware atleast a part of a method in accordance with an embodiment of the presentinvention.

In one embodiment, memory 3300 can be coupled to a processor 3200 andcan store instructions 3400 adapted to be executed by processor 3200according to one or more actions of method 100. Memory 3300 can be anydevice capable of storing analog or digital information, such as a harddisk, Random Access Memory (RAM), Read Only Memory (ROM), flash memory,a compact disk, a magnetic tape, a floppy disk, and any combinationthereof.

In one embodiment, instructions 3400 can be embodied in software, whichcan take any of numerous forms that are well known in the art. Forexample, system 200 can utilize one or more databases having a flat fileor a relational organization, and a centralized or distributedarchitecture. For instance, those of skill in the art can tailorproducts such as an SQL database to provide the functionality of method100 and system 200. One supplier of such database products is OracleCorporation, of Redwood Shores, Calif. Moreover, software standards andprotocols such as EDI, FTP, HTTP, HTML, XML, cXML, XSL, SSL and WAP canbe utilized for communications between information devices.Additionally, system 200 can utilize platform-independent and/ornetwork-centric software tools such as, for example, CGI, Java, orJavaScript. In one embodiment, I/O device 3500 can be an audio and/orvisual device, including, for example, a monitor, display, keyboard,keypad, touch-pad, pointing device, microphone, speaker, video camera,camera, scanner, and/or printer, including a port to which an I/O devicecan be attached or connected.

Exemplary Utilization Short-Term Funding and Cash Management

We now turn to an exemplary utilization of an embodiment of theinvention involving short-term (typically less than a year with themajority of financial instruments settling in less than 90 days) fundingand cash management. Short-term funding and cash management typicallyinvolves foreign exchange forwards and options, repos and money marketinstruments such as commercial paper and certificates of deposit, notesand bonds with, typically less than a year to maturity, overdraftfacilities, and bank deposits.

In this example, the agent first demonstrates the transparency of themethod. The demonstration might involve a presentation to the client onhow he might be enabled to access information and/or a trial period ofone, two, or more of the agent's activities described below. After thedemonstration, the agent begins receiving information on a daily basis(or more frequently if required) of all known or expected inflows andoutflows from operations at the client over the next few days and/ormonths. Based on this information, together with the financialguidelines on the minimum liquidity to be maintained (e.g. on demand,two-days notice, one-month notice, etc), the agent borrows and investsin the markets to meet all cashflow deficits and surpluses respectively.The maturity of the borrowings and investments takes into account theshape of the yield curve in each currency. By incorporating the abilityto search for the best rate or price and transact electronically witheligible counterparties and exchanges, the agent might automate thisfront-office treasury function, provided that the information from theclient regarding the operational cashflows of the business function isfed into the agent's systems and updated with the required frequencynecessary for the effective performance of the financial function.

For some clients, such as corporates and commercial banks, theinformation can arrive at the agent directly from the operational unitsof the client, while in other cases the cashflow information can begenerated by the agent's systems themselves. The latter applies toclients with pure trading businesses such as hedge funds or capitalmarkets operations of small investment banks which tend to have treasurydepartments comprising of three or four market professionals to supporta team of, say, ten proprietary traders and, say, ten sales and tradingprofessionals respectively.

The typical size of such purely financial trading business might includein addition to the front-office described above, a middle-officecomprising of, say, twelve professionals and a back-office of similarnumbers. The agent could take over these functions and automate them asmuch as possible. The clients would then be able to focus on their coreactivities, e.g. proprietary trading for the hedge funds and clientderivatives and securities sales and trading for the investment bank,and the strategic aspects of the financial function, e.g. minimumliquidity requirements during both normal and abnormal or crisis marketconditions, while leaving the agent to focus on the day-to-day runningof the operation.

Tokai Bank Europe plc (“TBE”) is a typical example of a medium sizefinancial trading firm, regulated by the Financial Services Authority(“FSA”) of the United Kingdom, which possess a hedge fund typeproprietary trading business, a client capital markets business, andmiddle- and back-office support functions of approximately the sizedescribed above. Even if an agent could demonstrate that it could runTBE's treasury function, together with the entire middle- andback-office support functions for the two front-office activities, moreefficiently and at lower cost, TBE would be unlikely to outsource suchfunctions (and/or the FSA may find it difficult to allow it) unless theagent is able to demonstrate that the activities of the agent could bemade sufficiently transparent for TBE's management to at least maintain(or improve) its strategic control of the functions.

The agent might provide the client with the ability to remotely accessand/or monitor, on the client's computer screen, in real-time and/ornear-real-time, the risk management information being generated and howthe agent is reacting to that risk management information. The analysisof risk management information and/or instructions/recommendations tothe client can be provided by the agent over a network, such as via aWeb site, on any desired basis, such as hourly, daily, and/or weekly.

Risk committees, credit committees, and new product committees can beconducted by the agent on behalf of the client and the client can beencouraged by the agent to participate in such committees over anetwork. Financial regulators encourage trading operations of regulatedfirms to set up such committees, which are typically designed to analyzesystematically every aspect of new market risk positions, creditapplications and/or new product applications made by the front-officeteams. For regulated clients, their financial regulators might requirethat, at minimum, the agent sets up all the procedures and frameworksexpected and/or demanded from the client. For example, the agent mightimplement different levels of access and security of its own front-,middle- and back-office staff that are acting on behalf of clients, andfurther comply with specific procedures for regulated clients whichmight be specified by the regulators of such clients.

As an example of the extent that the communication between the agent andthe client could be automated, computer models can be made to dialtelephone numbers when pre-specified positions or risk levels arereached or whenever market risk indicators exceed given levels in orderto warn both the agent and the client that some action might benecessary if the markets move further. The system might also provide“buy/sell buttons” for the agent and/or the client to take correctiveaction if they wished to do so by implementing actions automaticallyand/or electronically based on the financial information. In certainmarkets, such “buttons” can provide an advantage for the agent and theclient by improving the speed at which actions can be implementedfollowing the analysis of new information. As another example, thetechnology could alert both the agent and the client that a particularcash balance will be transferred to another eligible bank counterparty,which has announced a better rate, and provide a “stop transfer button”for the client to halt the transfer and/or replace by an alternativeaction if the client wishes to do so. The agent can implement actions onbehalf of the client unless the client via the network halts the actionsand/or removes the agent's authority to take actions on his behalf.

The above description is equivalent to passive trading execution wherethe agent follows the client's financial guideline and benchmark on abest-efforts basis and for a flat fee. The method of the presentinvention will also allow this passive method to be extended to activetrading by allowing the agent to trade at its own discretion on behalfof the client within the risk limits provided by the client. Forexample:

-   -   1. hedging with off-the-run Treasuries by the agent rather than        the more liquid on-the-run Treasuries could be regarded as an        exercise of discretion by the agent in the trading execution and        therefore still treated as passive trading;    -   2. extending the duration of a short-term debt portfolio from,        say, 3 months to 9 months in anticipation of higher interest        rates would be regarded as discretionary trading and therefore        treated as active debt management;    -   3. funding through the repo market (i.e. the simultaneous sale        and forward purchase of a government bond in order to raise        short-term funds secured by the security being lent) and stock        lending (i.e. the lending of a security to a counterparty that        wishes to short (i.e. sell) the same security which he does not        own) are also activities that could be treated as discretionary        and therefore part of active trading, although a sophisticated        client might wish to regard these activities as part of the        passive management function.

In cases where the agent engages in active trading on behalf of clients,the agent might receive an out-performance fee. An example of anout-performance fee might be 20% of the funding costs savings relativeto the benchmark funding costs of, say, LIBOR—5 basis points. In thisexample, if the agent achieves average funding costs over the evaluationperiod of, say, LIBOR—30 basis points, it will receive anout-performance fee of 5 basis points (=20% of 0.0025%). The agent canbe a regulated entity in its own right, particularly if the clients ofthe agent include many regulated clients, and might therefore need tocomply with further regulatory guidelines and procedures. The internalframework and procedures used by the agent to allocate block tradesamong multiple clients and to manage conflicts of interests might beclosely examined by the agent's regulators who might introduceadditional requirements in cases where the agent receives anout-performance fees in connection with discretionary trading activitieson behalf of clients. The ability to carry out the above functions formultiple clients with different financial objectives and guidelines at acost lower than the sum of the costs of the agent incurred in respect ofeach client in order to assume the financial functions being outsourced,constitutes one potential advantage of embodiments of the presentinvention.

Exemplary Utilization Asset and Liability Management (“ALM”)

Another exemplary utilization of an embodiment of the present inventioninvolves asset and liability management (“ALM”), which, when restrictedto pure financial assets and liabilities, extends short-term cashmanagement and funding to medium- (between 1 year and 3 years) andlong-term (over 3 year) transactions. Treasury operations of financialfirms and some larger corporate, combine ALM with the short-term fundingand cash management. ALM typically involves interest rate and/orcurrency swaps and long-term options on bonds and/or swaps, which couldbe regarded as more complex (than the short-term money marketinstruments of the short-term cash management and funding functiondescribed above) since their cashflows and other contract terms aresometimes customized to the client's needs. For example, there might becredit mitigation arrangements, such as different types of collateral ormark-to-market provisions, which reduce the credit exposure (e.g. byeither requesting the posting of further collateral, or by changing theterms of the transaction without altering the net economic effect) atregular intervals or whenever the exposure exceeds trigger levelsspecified up-front.

Thus the provision of ALM by an agent to a client might include acollateral management system, and/or counterparty exposure and limitutilization system for derivatives. Typical ALM financial guidelines,benchmarks and risk limits can include:

-   -   1. the matching all assets and liabilities, allowing for        mismatches which generate a value-at-risk less than, say, $x        million over a 30-day period. (e.g. Abbey National plc's        treasury might express some financial guidelines and risk limits        in this manner);    -   2. the maintaining of a target duration and currency composition        for a net long-term debt portfolio, allowing deviations within        specified ranges expressed in percentage terms. (e.g. an        approach could be appropriate for BP Finance or for the Swedish        Debt Office); and/or    -   3. the selection of the debt portfolio's fixed-floating mix so        as to match the duration of the cashflows from operations,        estimated/calculated by the client and communicate to the agent        within the financial information. For example, the cashflows        from operations might result from auto leases whose pre-payment        rates are assumed not linked to the levels of interest rates.        Such cashflow from operations might provide the basis for        determining a benchmark around which the debt portfolio is        managed within either value-at-risk limits or duration ranges.        Toyota Motor Credit Corporation (“TMCC”) might be an example of        such an operation.        ALM can also be extended to cases where the behavior of either        the assets or the liabilities arising from operational cashflows        can be approximately matched by the other side. Typical ALM        financial guidelines, benchmarks and risk limits in these cases        might include:    -   1. the matching of potential the complex option-like behavior        that might result from a portfolio of fixed rate home loans        whose pre-payments rates are linked to the prevailing levels of        interest rates by embedding and/or replicating such behavior        within the debt portfolio. The ALM benchmark in this case might        be a complex liability portfolio;    -   2. the approximate matching of pension claims for an aging        population with an asset portfolio comprising equities, fixed        income and cash. The ALM benchmark for such a portfolio might        start as a pure equity asset portfolio and gradually increase        the proportion of fixed income and cash as the population ages.        Value-at-risk limits could be defined around this dynamic        benchmark;    -   3. the approximate matching by an asset portfolio of the        behavior of a portfolio of insurance claims triggered by        prolonged cold weather in a particular region. This example        could apply to a local government authority whose outflows        exceed inflows at times of prolonged cold weather because of the        higher costs of clearing roads and additional social security        related payments. The ALM benchmark for the asset portfolio        might include insurance derivatives and/or stocks whose price        has historically benefited from prolong weather periods such as        natural gas producers. Value-at-risk limits might be the most        appropriate way of measuring the risk of deviating from such a        benchmark; and/or    -   4. the selection of the duration and currency composition of a        foreign reserves asset portfolio by a central bank of a        developing country so as to approximately match the        characteristics of the demand for reserves. For example, the        benchmark currency composition might be set to approximately        match the currency of denomination and/or the geographical        distribution of imports combined with foreign debt service        payments, while the benchmark duration might be set by reference        to the level of reserves. ALM risk limits in this case might be        set either in terms of duration and currency ranges or in terms        of value-at-risk, while performance might be measured by        reference to the above benchmark duration and currency        composition created by customizing government bond and money        market indices.        Exemplary Utilization: Credit Management

Another exemplary utilization of an embodiment of the present inventioninvolves credit management, which can involve the management of creditexposures arising from:

-   -   1. bonds and money market instruments issued by corporates,        financial institutions, and/or governments not regarded as        credit risk free. The credit exposure of such instruments is        given by their market value;    -   2. counterparty exposure on derivatives, which measures the loss        that might result from the default of the counterparty of the        derivative before the expire of the contract in circumstances        where the value of the derivative is negative for the        counterparty;    -   3. credit derivatives, which are derivatives contracts with a        counterparty where, provided that certain conditions are        fulfilled, the value of the contract might be linked to the        credit of a third party. The credit exposure generated by these        financial instruments can be a complex portfolio of exposures to        both bond issuers and counterparties as defined above;    -   4. lending to third parties in secured and/or unsecured form;        and/or    -   5. counterparty exposure for securities trading, which measures        the loss that can result from the default of the counterparty of        a security sale or purchase before the settlement of the trade        in circumstances where the price of the security has moved        against the counterparty over this relatively short period of        time before settlement. The credit exposure here depends only on        the likelihood and magnitude of price changes over such a short        time period and therefore it is considerable smaller, than the        exposures generated by the above other four credit activities.

Some of the above credit activities, by themselves, can be regarded asfinancial functions. However, the combination of all the aboveactivities can also be regarded as a financial function. For example, ifthe client is a either a development bank (e.g. the Development Bank ofJapan) or a commercial bank (e.g. the Bank of Nova Scotia), lendingexposures can be evaluated and managed by the credit department, and theresults of this loan management function can be communicated to thetreasury function (and/or directly to the agent providing the treasuryfunction) and conversely, particularly in circumstances where there isan overlap or correlation between the credit of the borrowers and thatof the bond holdings and/or derivatives counterparties of the treasuryfunction.

Typical credit financial guidelines and benchmarks can be constructedfrom historical default probabilities and/or credit spreads. Risk limitscan then be defined in terms of credit value-at-risk, which quantifiesthe worst case, e.g. the 5% worst outcomes where credit losses throughdefaults exceed the expected default losses. Risk limits can also bedefined in more simple terms as the maximum amounts permissible for eachcredit and/or each credit rating class where the latter might be splitby country and/or industry.

Credit risk management might include, in addition to the evaluation ofstand-alone exposures, the evaluation of incremental and marginalexposures of transactions, counterparties and/or netting agreements. Theincremental exposure shows the net effect on the total portfolioexposure of adding a new exposure, while the marginal exposure shows thenet effect of removing form the portfolio a particular transaction,counterparty and/or netting agreement.

Credit risk management might also include the estimation of the impactof individual transactions on the expected portfolio credit losses. Bycombining the expected exposure (calculated by statistical simulation inthe case of derivatives) with default probabilities (implied by marketprices and/or obtained from historical data), the expected creditdefault losses and hence reserves can be estimated. Credit value-at-riskthen estimates the additional losses likely to be incurred in the 5% (or1%) worst scenarios based on the historical data used to provideestimates of the likelihood of changes in the default probabilities ofdifferent credits and their correlations.

The above activities can be regarded primarily as middle-office typefunctions. However, sophisticated investment banks (e.g. JP Morgan) areable to combine their front-office credit spread trading functions withthe above type of middle-office credit risk management function into asingle combined credit management function. To achieve this type ofintegration, certain embodiments of the present invention mightconstruct, calibrate and store credit curves for every borrower, issuerand derivative counterparty by calibrating to market prices of liquidfixed and floating bonds or credit default swaps, and then to use thecredit rating classes to map such borrowers, issuers and/orcounterparties onto sets of generic credit rating curves (such as thoseprovided by credit rating agencies). Alternatively, defaultprobabilities might be allocated directly to those illiquid loan-typeexposures, where only historic default data is available.

Embodiments of the present invention will therefore give the agent theability to price each credit exposure on a stand-alone basis, as well ason an incremental and/or marginal basis as defined above. The ability toprice, risk manage and/or hedge credit, can enable the agent to tradecredits (in the form of loan and/or bond sales and credit derivativestransactions) with third parties on behalf the client. This ability canalso be an important ingredient for the credit risk management of credittrading portfolios which include credit derivatives, as theseinstruments generate two exposures: to the counterparty and to theissuer of the underlying reference security. Therefore, in order toevaluate the credit exposure and risk on such instruments it isnecessary to have an integrated approach for the management of these twotypes of exposures, which only specialized financial services firms andsophisticated investment bank might posses. Embodiments of the presentinvention can allow the agent to make such approach available to clientsand, in particular, to those that could not justify the necessaryinvestment in software, hardware and, most importantly, technicalknow-how, that would be required to acquire such integrated approach.

Further, the ability of the agent to, for example, exchange credits onbehalf of the client in areas where the client is over exposed, withcredits where which have a lower correlation with the other credits ofthe client, might result in a reduction of the overall credit risk forthe client (even in cases where the stand-alone credit risk of thecredits being exchanged is the same or even greater) by taking advantageof portfolio diversification effects. This combined credit managementfunction, which up to now could only be practiced by the verysophisticated investment banks, might be made available to a pluralityof less sophisticated financial clients by the agent acting on theirbehalf, and this is another important benefit of embodiments of thepresent invention.

Exemplary Utilization Combined Market and Credit Management

Yet another exemplary utilization of an embodiment of the presentinvention is the combined management of market and credit. This might bedone by modeling both credit and market exposures on a consistent basiswithin the same framework and by taking into account the correlationbetween FX and interest rates (and also electricity prices, weatherand/or legal insurance costs, and/or commodity prices, if applicable)and default probabilities.

For example, the defaults of foreign currency liabilities might bestrongly linked to the weakness of the domestic currency of acounterparty (of the client) from a developing country. Thus across-currency swap in which such counterparty receives its own domesticcurrency and pays the foreign currency might be treated by the client asan un-collateralized foreign currency loan in the event of devaluationof the counterparty's domestic currency.

Similar examples can be provided involving traded commodity prices, oiland/or electricity prices, weather and/or legal insurance costs. Forexample, a treasury operation of a firm such as Pemex of Mexico, mightbe exposed to the following: a devaluation of the domestic currencyagainst the US Dollar; higher foreign interest rates on its debtportfolio; swap counterparty credit exposures on its FX, interest ratesand commodity derivatives; oil prices; natural gas prices in theirregulated domestic market which might be linked to factors such as theweather and electricity prices; and/or pollution damage legal claimswhich might in turn have links to the level of their oil and natural gasproduction. Although Pemex is a relatively very large firm, it might bedifficult for them to justify the investment of resources that would berequired for the combined management of these exposures using theavailable state-of-the art models and techniques. In contrast, the agentmight be able to justify such investment if it can provide theseservices to a plurality of clients.

Thus, the rate at which financial risk management and trading technologyis being developed combined with the large choice available to end-usersmight result in many such end-users not being able to justify theinvestment (in terms of know-how, rather than costs since the latterappear to be constantly falling) in acquiring it. An important benefitof certain embodiments of the present intention is to bring the benefitsof such state-of-the-art technology to such end-user clients by anagent.

Advantages

There are numerous advantages to various embodiments of the disclosedinvention. For a client, outsourcing the risk management and trading ofa financial function can allow the client to:

-   -   1. Focus on its core business and on the strategic aspects of        the financial functions being outsourced without diverting        valuable resources to their day-to-day operation;    -   2. Improve the management of the financial functions by        receiving relevant information only, together with analyses of        the information performed by external risk management and        trading professionals;    -   3. Reduce costs;    -   4. Reduce operational risks;    -   5. Create value through more efficient trading execution;    -   6. Out-perform the benchmark by giving trading discretion to the        agent within the risk limits; and/or    -   7. Maintain the desired level of control over the financial        function by making use of the transparent communication        facilities provided by the agent.        For an agent, the providing financial functions for a plurality        of clients can allow the agent to:    -   1. Automate the functions by communicating with exchanges and        counterparties electronically, thus gaining timing advantages in        the execution of trades;    -   2. Reduce transaction costs by amalgamating trades on behalf of        several clients;    -   3. Reduce operational costs through economies of scale;    -   4. Insure against operational risk at a lower cost because of        the diversification benefits of performing functions for        different clients; and/or    -   5. Gain the confidence of the client and reduce the potential        legal liability by providing real-time or near-real-time        transparency and historical actions reviews and audit trails.

Still other advantages of embodiments of the present invention willbecome readily apparent to those skilled in this art from theabove-recited detailed description and the accompanying drawings.Accordingly, the drawings and descriptions provided herein and herewithare to be regarded as illustrative in nature, and not as restrictive.

1. A computer-assisted method comprising: relating to each of aplurality of institutional or corporate clients of an agent:demonstrating, to the client, that a plurality of credit managementactivities of the agent on behalf of the client are securely,continuously, and transparently monitorable by the client in real-timeacross a packet-switched public network via a network-based userinterface; receiving from the client financial information sufficient toenable the agent to perform the plurality of credit managementactivities on behalf of the client; performing, by the agent, theplurality of credit management activities on behalf of the client, theplurality of credit management activities comprising: creating riskmanagement information relating to the financial information; based onan analysis of the risk management information in the context of thefinancial information, identifying credit exposures arising from:positions on bonds and money market instruments; derivativescounterparties; securities trading counterparties; and loans; based onthe analysis of the risk management information in the context of thefinancial information, determining actions to manage the creditexposures, the actions comprising: monitoring credit risk limitsutilizations and positions with derivatives counterparties, securitiestrading counterparties, borrowers, and bond issuers; monitoring thattransactions are undertaken with eligible counterparties and on eligiblefinancial products; producing daily actual profit and loss reports;producing daily predicted profit and loss reports from positionsinformation combined with the risk management information; comparingdaily actual profit and loss reports to predicted profit and lossreports; determining particular trades and hedges to manage the creditexposures; and causing execution of the determined trades and hedges,said execution adapted to be halted in real-time by the client acrossthe packet-switched public network via the network-based user interface;automatically recording a verifiable audit trail of the plurality ofcredit management activities performed by the agent on behalf of theclient, the audit trail comprising a log of all executed trades andhedges and a record of market conditions at the time of each executedtrade and hedge, the audit trail securely, continuously, andtransparently examinable by the client across the packet-switched publicnetwork via the network-based user interface; and in real time,securely, continuously, transparently, and automatically communicatingthe plurality of credit management activities of the agent to the clientacross the packet-switched public network via the network-based userinterface.